You Did Realize We Were Bailing Out Europe, Didn't You?
Yesterday, the CATO Institute Tweeted: "The Federal Reserve is secretly propping up Europe with American money. Why?"
Secretly? It's no secret. It's all out there in the open, as Gerald P. O'Driscoll notes, it's just that no one in America is noticing:
America's central bank, the Federal Reserve, is engaged in a bailout of European banks.
Surprisingly, its operation is largely unnoticed here. The Fed is using what is termed a "temporary U.S. dollar liquidity swap arrangement" with the European Central Bank (ECB). There are similar arrangements with the central banks of Canada, England, Switzerland and Japan. Simply put, the Fed trades or "swaps" dollars for euros. The Fed is compensated by payment of an interest rate (currently 50 basis points, or one-half of 1%) above the overnight index swap rate. The ECB, which guarantees to return the dollars at an exchange rate fixed at the time the original swap is made, then lends the dollars to European banks of its choosing.
And as he points out,
No matter the legalistic interpretation, the Fed is, working through the ECB, bailing out European banks and, indirectly, spendthrift European governments. It is difficult to count the number of things wrong with this arrangement.
First, the Fed has no authority for a bailout of Europe. My source for that judgment? Fed Chairman Ben Bernanke met with Republican senators on Dec. 14 to brief them on the European situation. After the meeting, Sen. Lindsey Graham told reporters that Mr. Bernanke himself said the Fed did not have "the intention or the authority" to bail out Europe. The week Mr. Bernanke promised no bailout, however, the size of the swap lines to the ECB ballooned by around $52 billion.
Second, these Federal Reserve swap arrangements foster the moral hazards and distortions that government credit allocation entails. Allowing the ECB to do the initial credit allocation — to favored banks and then, some hope, through further lending to spendthrift EU governments — does not make the problem better.
Third, the nontransparency of the swap arrangements is troublesome in a democracy. To his credit, Mr. Bernanke has promised more openness and better communication of the Fed's monetary policy goals. The swap arrangements are at odds with his promise. It is time for the Fed chairman to provide an honest accounting to Congress of what is going on.
Would members of Ricochet like to help count the other ways this arrangement is wrong? I bet we can come up with reasons four, five, six, seven, eight, nine and ten within the hour.
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Jan '11
Re: You Did Realize We Were Bailing Out Europe, Didn't You?
How does swapping dollars for euros help the european banks?
Jan '11
Re: You Did Realize We Were Bailing Out Europe, Didn't You?
It creates artificial demand for the artificial Euro and keeps it from actually collapsing under the weight of the profligate PIIGS.
Edited on December 30, 2011 at 1:57pmJan '11
Re: You Did Realize We Were Bailing Out Europe, Didn't You?
And we all know there's no possible way we might end up on the losing end of a deal like that. I mean, it's not like the ECB could just wait until the market rate is higher than the agreed rate and then sell us our own money back at a discount.
Edited on December 30, 2011 at 1:56pmThis sort of thing has worked out so well before with Citibank, and GM, and AIG, and Chrysler, and…
Sep '10
Re: You Did Realize We Were Bailing Out Europe, Didn't You?
Most international debt and business is conducted in dollars, not Euro's, therefore European banks cannot function without dollars.
Sep '10
Re: You Did Realize We Were Bailing Out Europe, Didn't You?
Ajax Telamônios
Unless Bernanke was lying at his recent congressional testimony this statement is not correct. Ben testified that the Fed was protected from currency fluctuations in the swap arrangements. ie: if the euro appreciates against the dollar the Fed would get more dollars back when the swap was settled.
May '11
Re: You Did Realize We Were Bailing Out Europe, Didn't You?
Say what you will about Ron Paul. He has been telling us about the Fed's mismanagement for years. Here is one of his more recent efforts where he talks about the Fed giving $$ to Libya...last year.
Sep '10
Re: You Did Realize We Were Bailing Out Europe, Didn't You?
It is strange to now hear Republicans complaining about policies agreed on by the Paulson, Bush, Bernanke trinity and eagerly pursued by Obama. The GOP controlled house asked Bernanke two questions regarding the Swaps. It is clear Congress does not want to know. The Bush/Obama weak dollar policy mandates this or similar action by the Fed. All who favored the bailout favor these arrangements. When one acts as if the solution to a debt crisis is is more debt, the currency that the debt is denominated in has to be made as cheap as possible. Note that the world is being flooded in dollars and there is still little inflation. Could it be the much heralded bailout is not working?
Jan '11
Re: You Did Realize We Were Bailing Out Europe, Didn't You?
That presumes he can be trusted to stick to the original terms of the agreements and won't come up with some sneaky and byzantine method of delaying the payments or just rolling over the swaps until the end of time or whatever.
Apr '11
Re: You Did Realize We Were Bailing Out Europe, Didn't You?
End the Fed.
Sep '10
Re: You Did Realize We Were Bailing Out Europe, Didn't You?
One wonders to what extent we would be better off if the various banks who have demand for dollars from their customers were refused by the Fed. Are the BMW plants in South Carolina not permitted to pay their workers in dollars because Deutsche Bank made some stupid loans to Greece? The term "bailout" is on the verge of such over use as to drift into meaninglessness. If Italian depositors in Italian banks would rather hold dollars than Euro are we supposed to tell them they can't because the bank and the nincompoops that run their governments have made a ton of bad decisions? We do have a weak dollar policy and I disagree with it but limited demand for dollars is not the way to make the dollar strong.
Dec '10
Re: You Did Realize We Were Bailing Out Europe, Didn't You?
Did we notice we're bailing out Europe? Nope, we American are too busy focusing on what "Snookie's" next antics on Jersey Shore will be.
Jul '11
Re: You Did Realize We Were Bailing Out Europe, Didn't You?
The EU nations in trouble have 1.2 trillion dollars available to deal with 2.6 dollars in debt maturities next year from sovereign nations and state banks. The recent Fed trick only produced a small and transient improvement in bond sales. The EU has no exit strategy for a nation that goes under and one nation most certainly will within 18 months. If those debt maturities actually get paid you will see asset sell off, a continued slight decrease in gold and for a time a stronger dollar. The debt contagion will drive our markets down considerably and Bernanke knows this. The Fed is more politically entwined than ever so the recent actions should be consider as a potential action by Bernanke to help out the Obama regime. Alternatively Bernanke's actions can also be seen as business as usual where a few sinister Fed reserve banks get vast wealth while the US taxpayers get the bill.
Nov '11
Re: You Did Realize We Were Bailing Out Europe, Didn't You?
It's too complicated for us mere mortals. Truth be told, it's also too complicated for the demigods at the Fed, IMF, ECB.
The demigods do X to increase Y. But then Y doesn't move, or Y moves negative. Or Y moves, but so does Z, which is the last thing anyone wanted.
One thing demigods know for sure is that they are expected to do something.
One thing everyone knows for sure is how frightful it might be if demigods do nothing when everyone expects demigods to do something.
But because everyone already expects demigods to do something, when they do do something, it doesn't help much because . . . everyone already expected it.
So demigods have to do something big and surprising, which terrifies everyone because it seems desperate . . . and wastes so much money.
Mere mortals wonder, "If demigods knew what they were doing, how'd we get into this mess?"
Mere Mortal Econ Rule 1: Eventually (sooner than you think), production must exceed consumption, or you start eating your children or neighbors.
Mere Mortal Econ Rule 2: If you want more nice stuff, please produce more nice stuff.
Mere Mortal Econ Rule 3: Stop the demigods.
Jul '11
Re: You Did Realize We Were Bailing Out Europe, Didn't You?
The first law of economics is that there is a finite amount of resources. The first law of politics is to ignore the first law of economics. Somehow I think this applies here.
Sep '10
Re: You Did Realize We Were Bailing Out Europe, Didn't You?
Ajax Telamônios
That presumes he can be trusted to stick to the original terms of the agreements and won't come up with some sneaky and byzantine method of delaying the payments or just rolling over the swaps until the end of time or whatever. · Dec 30 at 5:32am
It also presumes that the ECB will be there and be able to purchase the dollars, which if the euro collapses may will not be the case. The idea that the Feb is doing something that the political establishment is not aware of and has not given its passive approval to is nonsense. There are two possible outcomes, eventual financial collapse or politicians will start behaving like mature responsible adults. I think the former is much more likely.
Nov '11
Re: You Did Realize We Were Bailing Out Europe, Didn't You?
Locke might argue a bit about the finitude of resources.
Yes, resources coming directly from the hand of nature are limited.
But with the addition of human labor, those finite resources can be multiplied almost infinitely. For example, compare the quantity of "wild" fruit and grain nature produces with the abundance of fruit and grain produced in a cultivated field by the addition of human labor.
The astounding abundance in the modern West shows how virtually infinite are the goods that can be produced from the "finite" resources of nature . . . simply by the addition of human labor.
Labor, human productive capacity, is the key to wealth production.
But if you want humans to labor, you have to let them have and enjoy the fruit of their labor, i.e., you have to let them keep the private property they create by their labor. Why sow the field if the taxman takes the harvest?
Moving money from one pot to another, in and of itself, does nothing, zero, nada.
Jul '11
Re: You Did Realize We Were Bailing Out Europe, Didn't You?
liberal jim
Ajax Telamônios
That presumes he can be trusted to stick to the original terms of the agreements and won't come up with some sneaky and byzantine method of delaying the payments or just rolling over the swaps until the end of time or whatever. · Dec 30 at 5:32am
It also presumes that the ECB will be there and be able to purchase the dollars, which if the euro collapses may will not be the case. The idea that the Feb is doing something that the political establishment is not aware of and has not given its passive approval to is nonsense. There are two possible outcomes, eventual financial collapse or politicians will start behaving like mature responsible adults. I think the former is much more likely. · Dec 30 at 10:14am
Financial collapse of all fiat currencies is inevitable. The question is when.
Astonishing, it is always finite, not infinite. Expansion of resources still has limitations although science pushes the boundaries ever on and the human spirit to produce still rules our world, for now.
Nov '11
Re: You Did Realize We Were Bailing Out Europe, Didn't You?
DocJay
. . . . Astonishing, it is always finite, not infinite. Expansion of resources still has limitations although science pushes the boundaries ever on and the human spirit to produce still rules our world, for now.
Thank you for almost entirely missing my point, thereby reminding me of a lesson momentarily forgotten.
Jul '11
Re: You Did Realize We Were Bailing Out Europe, Didn't You?
Sorry for thinking semantics. Your points are quite valid and I agree, feel better? I just hit the like button too.
Edited on December 30, 2011 at 8:22pmNov '11
Re: You Did Realize We Were Bailing Out Europe, Didn't You?
Much!